Reports that Ireland’s tax policy has become an issue in coalition talks in Germany between Chancellor Angela Merkel’s Christian Democrats and the centre-left Social Democrats (SPD) have set off a festival of self-righteousness and bluster among our politicians. The prize this time must go to Fianna Fáil leader Micheál Martin, who called on Tánaiste Eamon Gilmore to go to Berlin to confront the leaders of Labour’s German sister party “and make it clear that their demand to interfere with our corporation tax rate is unacceptable”. And Mr Martin warned Germany’s politicians that “posturing on the future of Ireland’s corporation tax regime is unacceptable and must stop”.

Growing disquietIn fact, the SPD’s demands about tax are anything but a posture and they are less an expression of antipathy towards Ireland than of popular opposition to taxpayer bailouts of banks and growing disquiet over the tiny sums in tax paid by digital giants such as Google. These sentiments are shared across Europe and in the United States, where tax avoidance by multinational corporations is a live political issue.

The main focus of the SPD’s concern appears to be Dr Merkel’s support for the use of the European Stability Mechanism, the European Union’s permanent bailout fund, to directly recapitalise ailing banks across the euro zone. The Social Democrats instead favour the establishment of a common European bank resolution fund that would be financed by the financial services industry itself through the introduction of a new tax on financial transactions. Eleven of the euro zone’s 17 member states have already committed to moving ahead with such a tax but the plans have stalled in recent months and EU legal experts have warned that the tax as currently envisaged could be illegal.

The loudest opposition to the financial transaction tax comes from Britain, which is outside the euro zone but fears the City of London could suffer if the tax is introduced elsewhere. Inside the currency zone, the staunchest critics are Luxembourg, the Netherlands and Ireland – all three of which are viewed across Europe, if not strictly speaking as tax havens, as prime locations for tax avoidance. The difference between the three is that, unlike Ireland, the Netherlands and Luxembourg are not trying to tap a common European fund for billions to recapitalise their banks. And SPD budget spokesman Carsten Schneider stated bluntly last week that “anyone who wants a common resolution fund must agree to a financial transaction tax”.

The other Irish issue said to be at stake in the German coalition talks is the possibility that, after Ireland exits the bailout programme on December 15th, the EU and the International Monetary Fund should continue support in the form of a precautionary credit line. The Social Democrats are reportedly insisting that no such credit line should be extended until Ireland agrees not only to support the financial transaction tax but also to make significant concessions on corporate tax.

Hours after that report was published, Taoiseach Enda Kenny was pledging to the Dublin Chamber of Commerce that the 12.5 per cent corporate tax rate remains sacrosanct. But the current interest in Ireland’s corporate tax regime across Europe and beyond has less to do with the rate than with the rules applied to multinational companies that set up here. And the reason the issue will not move off the international agenda is that public opinion around the world is increasingly outraged by the behaviour of the digital behemoths.

Last week, Google reported that it had funnelled €8.8 billion in royalty payments to Bermuda in 2012, using legal but controversial tax structures known as the “double Irish” and the “Dutch sandwich” that exploit differences between tax codes in various countries. Although Google has far more customers in other European countries, almost all its European income is earned in Ireland – a practice described earlier this year by British parliamentarian Margaret Hodge as “devious, calculating and unethical”.

Heightened scrutiny of their tax affairs comes as the digital giants have lost much of their remaining gloss following revelations about how they exploit user data and share information about customers with intelligence agencies. As digital commerce expands and more companies take advantage of complicated, international tax structures, popular outrage is certain to grow and the pressure on Ireland is likely to mount.

In this context, bleating about sovereignty while asking for financial support from other EU states may not be the most persuasive response to criticism of Ireland’s tax regime. It would be wiser to start thinking about how the tax system can remain competitive without being so vulnerable to criticism that it is exploitative and unfair.

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